LIVE MARKETS Investors rush to cut ECB hike bets

  • STOXX 600 tracks global rebound
  • Russian offensive continues in Ukraine
  • Sanctions against Russia spare energy sector, SWIFT
  • Utilities outperform
  • Wall Street futures in the red

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Investors rush to cut ECB hike bets (1315 GMT)

Amid war-driven stagflation concerns, investors have scaled back their interest rate hike bets this week for the European Central Bank as they sense the central bank will avoid adding fire to the market volatility and hurting growth prospects after Russia's all-out invasion of Ukraine.

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Investors now expect the ECB to increase its benchmark interest rate by 35 basis points by the end of December, sharply scaling back their views from just a few days ago for a 50 bps hike by the end of the year.

"Given the significant rise in near-term inflation we expect there will be limited room for front-end rates to rally further," Goldman Sachs economist George Cole. "The market’s response in front-end rates in Europe has been to price out hikes".

The Ukraine conflict has raised fears of surging inflation in the near term and lower potential economic growth.

"Central banks' stagflation trade-off has only become more difficult amid the Russian invasion," said Kristoffer Kjær Lomholt, Chief Analyst at Danske Bank.

At a review, ECB president Christine Laggard sent traders scrambling to price in a first interest rate forecast as early as June after she signalled that interest rate hikes were not ruled out this year. But the Ukraine crisis complicates the ECB's path out of negative interest rates. read more

(Joice Alves)



European banks had their worst trading session since the 2020 COVID-19 crash yesterday and today's rebound of 2.5% is unlikely to shake the doubts growing about the sector.

Going overweight on European banks has been a winning trade in 2021 but Russia's invasion of Ukraine has changed expectations about the ECB's monetary policy moving forward.

"For policymakers, it becomes a matter of prioritization, and it is likely that they will refocus on the risks to growth, rather than the risks to inflation in the short-term.” said Seema Shah , Chief Global Strategist at Principal.

According to BofA equity strategists, "the consensus overweight in European banks looks vulnerable".

Limited central bank tightening could remove key support for financial stocks, which they recently downgraded from overweight to marketweight.

“If growing macro downside risks lead to less central bank tightening, and, hence, reduced bond yield upside, this would remove a key support for financials at a time at which weakening growth momentum and widening credit spreads already point to scope for underperformance,” the BofA strategists wrote in a note.

The banking (SX7P) sector has outperformed the general European index since November 2020:


But the picture looks quite different these last few days:


(Lucy Raitano)



With the largest conflict in Europe since the second World War ratcheting volatility in markets, here's a look at some of the major bank's current stance on handling their portfolios.

Goldman Sachs reduced its target for Europe's STOXX 600 (.STOXX) citing risks of slowing growth and higher inflation in the bloc as the crisis intensifies. Still, GS upped its forecast for London's FTSE 100 (.FTSE) which has little exposure to technology sector. read more

Bank of America echoed as it maintained its bearish stance saying it is too early to turn positive on European equities.

Across the Atlantic, Russia-Ukraine tension is a low earnings risk for U.S. corporates, noted J.P.Morgan earlier this week although acknowledging that an energy price shock amidst an aggressive central bank pivot focused on inflation could further dampen investor sentiment and growth outlook.

Citigroup was more upbeat about buying the dip as its global bear market checklist showed seven of 18 red flags.

Wedbush said it was using its playbook since 2000 of buying tech winners in times of global chaos, highlighting that tech stocks are the most oversold since 2014/2015.

U.S. stock closed higher in a stunning reversal on Thursday with the tech-heavy Nasdaq (.IXIC) rallying 7% from the session lows.

Wells Fargo maintained its bearish view, saying it was staying away from buying the dips on the latest selloff until there is more clarity in Russia's intentions.

Meanwhile, Mark Haefele, chief investment officer at UBS GWM said the geopolitical tensions and fears of a recession stemming from a flattening yield curve "speak in favor of reducing exposure to equities, especially when the recent sell-off in bond markets has increased the appeal of fixed income investments."

Just before Moscow's full scale invasion of Ukraine, investors had pulled money from bonds and pumped money into cash and stocks in the week to Wednesday, BofA's weekly flow report showed. read more

(Medha Singh)



Utilities have been gradually gaining speed during morning trading are now outperforming European equity markets by quite a big margin.


The sector's index is up about 5% at the moment against 1.8% for the STOXX 600 as investors are looking for both defensive stocks and sectors, like renewables, which might benefit from rising energy prices due to Russia's invasion of Ukraine.

Yesterday, the sector limited its losses to about 1%, about three times less than the pan-European index.

As a result, utilities are emerging as unlikely February winners and look like they could even end the month in positive territory (currently -0.08%).

Only miners and oil & gas did better this month with a rise of 4.7% for the former and a flat performance for the latter.

Utilities were a losing trade in 2021, a year during which they gained only 5.4%, roughly four times less than the 22.4% rise enjoyed by the broader European market.

As you can see below, while European utilities completely missed out on the rally in 2021, they seem like they might have a shot at closing the gap if the trend persists.

(Samuel Indyk and Julien Ponthus)



As expected European stocks markets have opened in positive territory this morning but the 0.7% rise enjoyed by the STOXX 600 at the moment doesn't quite make up for the 3.2% drop the pan-European index suffered yesterday.

In the same spirit, the 7% rebound of London-listed Russian gold and silver producer Polymetal is small change in comparison to the stock losing over a third of its value on Thursday.

On the bright side, all regional trading centres on the continent are in the black and the chemical sector is the only one trading in red, courtesy of Germany's BASF which just made a forecast for lower 2022 operating earnings.

The earnings season, rather than war in Ukraine, seems to be the main driver at the open with Swiss Re standing out with a 7% fall after its results.

Among winners, Britain's Pearson is up a handsome 8.6% after announcing a share buyback.

That said, defence stocks are still in demand with France's Thales and Germany's Rheinmetall both gaining over 4%.

All in all though, the STOXX 600 is still trading over 10% below its January record high and many investors fear that there's more room to reverse should the sanctions against Russia be ratcheted up further and Putin's tanks keep rolling.


(Julien Ponthus)



World markets may have recovered some of their worst losses after Russia's attack on Ukraine but a sombre mood prevails as what was seen as tail risk event for investors just a few weeks ago became a reality.

Asian markets rebounded and European stock futures are sharply higher after U.S. stocks rebounded in late Thursday trade as the United States unveiled fresh new sanctions against Russia. read more

For many investors it's a case now of wait and see what unfolds in the days ahead, such as the extent of sanctions, where energy prices settle and how central banks react.

Comments in the last 24 hours suggest major central banks will stick to their plans to tighten monetary policy in the face of inflation running at its highest level in decades. read more

Fed Governor Christopher Waller on Thursday laid out the case for raising U.S. interest rates by a full percentage point by mid-summer.

Some European Central Bank officials have suggested the invasion doesn't fundamentally change the economic outlook.

Still, a fresh wave of uncertainty means caution is likely.

The most aggressive rate hike bets baked into markets have been dialled back further, lifting sovereign bond markets.

But no doubt, with oil prices shooting above $100 a barrel following the invasion, another upward near-term shock to inflation is likely.

European natural gas soared more than 60% at one point on Thursday before settling to close just over 30% higher.

Russia's rouble, which took a beating on Thursday, meanwhile clawed away from record lows and was about 0.7% stronger against the dollar at 84.72 early London trade.

Russia has spent the past seven years building up formidable financial defences, yet in the long run, its economy is unlikely to withstand the onslaught of coordinated sanctions from the West. read more

The impact of tensions over Ukraine

Key developments that should provide more direction to markets on Friday:

- Companies shut Ukraine operations, assess impact of sanctions on Russia read more

-ECB President Christine Lagarde speaks

- Euro zone finance ministers meet

- German detailed Q4 GDP

- UK consumers suffer biggest confidence drop since start of pandemic - GfK read more

- US core PCE index/durable goods/final University of Michigan inflation expectations

- US earnings: Footlocker, Sempra

- European earnings: Evraz, Pearson, Amadeus, BASF, IAG, Rightmove, SEB, Swiss Re, Holcim, Jupiter

- Emerging market central banks: Colombia

(Dhara Ranasinghe)



It's puzzling to say the least to see European markets set to open in positive territory while Russian missiles strike Kyiv.

Which begs the question: are markets being complacent or just doing their cold-blooded job in assessing the impact of the conflict on the global economy?

Oddo equity strategist Sylvain Goyon just issued a note in which he explains why chances are on the former proposition.

"The uncertainty created by the Russian invasion doesn't seem priced in by the market to us", he writes.

Looking at equity risk premium models, Goyon draws the conclusion that markets are not factoring in the risk that the conflict triggers a recession.

He notes that a ban on Russian energy and commodity exports would have a major impact on the European economy, hitting growth and propping up inflation further.

In such a scenario, stagflation would be on cards, which is a hostile environment for stocks.

What to do? Goyon says that if events were to follow that course, investors should reduce their exposure to value and cyclicals and rotate towards growth, quality, defensive and dividend stocks.

(Julien Ponthus)



European stocks markets are set to track a fragile rebound in global financial markets which lifted Wall Street and Asian bourses after Western capitals announced sanctions against Russia overnight.

The mood is still cautious though and U.S. futures are trading in the red which suggests there are not that many investors willing to buy in what looks a temporary respite in the Ukrainian crisis.

A possible decision to disconnect Russia from the SWIFT international banking system or to target its oil and gas exports could have much bigger consequences for the world's economy.

In the meantime, oil is still over $100 a barrel and reports from Ukraine are really not encouraging with missiles pounding the capital as Russian forces advance.

(Julien Ponthus)


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